Like all relationships, the relationship between branded hotel operators or franchise companies (the brand) and hotel owners needs ground rules. As long as both parties agree to the rules and follow them, who can complain?

Now, what happens if the ground rules change? In most relationships, both parties would agree to change the rules — or they would separate and go their own ways.

And what if one of the ground rules is that only one party can change the rules at any time? And the other party would have to follow them, no matter what? This is what can happen to hotel owners that agree, often for very good reasons, that a brand can change its standards for the hotel.

Sometimes the change in brand standards is not so good for the owner… one day you’re turning a profit and the next day you’re in the hole, paying for expensive changes required by the “new brand standards,” with no return on investment in sight.

The management or franchise agreement sets the ground rules and allocates risk between the hotel operator and the hotel owner. Negotiating the agreement, which will include “brand standards”, is one of the most important things hotel owners will ever do for their hotel investment.

Here is some advice from my partner, Robert Braun, co-author with me of the HMA Handbook.

The hotel market in the United States is dominated by brands. And whether associated with a brand or not, hotels are commonly measured against established brands. The ability to finance a property may be determined by the availability of an established and successful brand, and the ultimate success of a hotel may depend on the strength of the reservation system, marketing, and other support provided by the hotel brand.

One of the consistent themes to all brand management or franchise agreements are “brand standards.” They are designed to provide the common feeling or identification which allow all hotels under a common name to be recognizable as part of the brand, eliminating inconsistencies and providing for a reliable guest experience, which should, in turn, create loyalty to the brand. From the owner’s point of view, these standards provide stability and are key to determining the proper brand – a developer or purchaser selects a brand largely based on whether that brand will meet the market for which the hotel has been designed.

But what happens if the brand changes its standards?

How can Brands change their standards?

The answer is simple – the brands put it in their franchise and management agreements. While the exact wording may differ from agreement to agreement – a “system” in one agreement may be a “standard” in another – every agreement provides that the brand may change its standards, and the owner must comply with those new standards.

Why change standards?

Brands usually have good reasons for changing their standards and systems. Doing so can be key to achieving the goal of a consistent guest experience and guest loyalty. If individual hotels were to make decisions as to amenities, a guest would never know what kind of hotel he or she would be visiting and would have less reason to prefer one brand over another.

In addition, standards for different classes of hotels tend to evolve over time, and modifying standards may be essential to remaining competitive. A hotel that may have been considered “midscale” ten years ago would only be a competitive midscale hotel today if it incorporated the technological and other changes that have been adopted by other hotels in its class. For example, few, if any, hotels had Internet access or flat screen televisions twenty years ago; those are now standard marketing tools for brands.

What can go wrong?

It all sounds good, but it’s not always a happy story. Sometimes, a brand may choose to make broad changes to its standards that force owners to face an expensive dilemma. They must either spend large, sometimes extravagant, funds to remain in compliance with the brand standards, or violate the terms of the franchise or management agreement, risk termination and pay even more expensive termination fees.

One of our clients recently faced this dilemma when it was notified that the property would require design changes to meet new brand standards. This change came despite the fact that the brand had already approved the plans and the hotel was well into construction. Furthermore, the changes would violate agreements with lenders and the city! We were able to negotiate a temporary reprieve, but it is clear that this story hasn’t yet ended.

Changing classes

The problem can also come up when a brand makes a conscious decision to upgrade, or downgrade, the status of its brand from one class to another. As reported recently, Intercontinental Hotel Group decided to upgrade its Crowne Plaza® brand from an “upscale” brand to an “upper-upscale” brand. As reported in HotelNewsNow.com, Janis Cannon, Vice President of global brand management for Crowne Plaza said, “We’re following what we call our ‘Rest to Best’ strategy where we want to get all of the hotels to move up to where the top-performing hotels are. There are plans to remove hotels from the system. It’s either move up or move out.” IHG expects that 10% of the hotels in the Crowne Plaza system “won’t fit the mold” and will be removed from the system. (See IHG to Crowne Plaza owners: Move up or move out.

When that happens, the owners’ dilemma is even greater. Not only must they consider the viability of implementing significant upgrades, they need to consider whether the new classification, which will inevitably change the economics of the flag, is consistent with their business plan. An owner that selected Crown Plaza specifically because it was an upscale hotel will have to either compete in a different environment, or negotiate an exit from the system and, most likely, reflag the hotel, often at considerable cost.

Why does this happen?

Owners should remember that decisions as to brand standards are made without regard to the individual hotels in the portfolio; they are made on a brand basis, with the overriding goal of maximizing the value of the hotel brand, not the hotels that make up the brand. While hotel brands typically do respond to their franchisees and property owners, they clearly retain the last word, and will impose their decisions.

What can I do?

While brands are very protective of their ability to modify their systems and standards, there are a few basic steps an owner, or prospective owner, can take to guard against these results.

If you are already signed up with a brand, you should diligently follow brand developments. Take advantage of owners’ groups and respond to indications that a brand may be preparing for a meaningful change.

Anyone thinking about a hotel franchise agreement or management agreement should consider these steps:

Consult with hotel franchise attorneys with lots of experience in dealing with the brands. It may be possible to negotiate limited, but meaningful, concessions, such as an agreement not to change the classification or scale of the brand, limit changes which would require structural revisions to the property, or require the brand to take into account the particular location and circumstances of the property.

Get someone with experience and practical judgment. You want someone who knows where to spend the “political capital.” There is no sense in fighting over provisions you will never be able to change, and you need reasonable positions and fallbacks.

Most importantly, consult your hotel attorney EARLY in the process — BEFORE you start exchanging term sheets or drafts of the letter of intent. Once that process has started, it will be very difficult to get any material changes in terms, even when your negotiations and term sheets are “non binding.”

Negotiating a hotel management or franchise agreement is one of the most important things hotel owners will ever do for their hotel investment. The terms of the agreement will have a significant impact on critical areas that affect profitability: operating costs, financing, and the value of your hotel.

Get it right the first time!

Consulting a hotel attorney early in the process and “getting it right the first time” is advice based on more than 20 years experience we have had in negotiating, re-negotiating, litigating, arbitrating and advising on more than 1,000 hotel management and franchise agreements on behalf of hotel owners, with all the major brands.

Go to the Management and Franchise Agreement section of the Hotel Law Blog to read more about the critical importance of hotel management and franchise agreements.

The HMA Handbook: Hotel Management Agreements for Owners, Developers, Investors and Lenders includes a section on “What You Need in Your HMA” and is available free of charge to hotel owners, developers, investors and lenders.

This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We’ve done more than $60 billion of hotel transactions and have developed innovative solutions to help investors be successful in bidding for hotel acquisitions, and helping investors and lenders to unlock value from troubled hotel transactions. Who’s your hotel lawyer?

________________________

Robert Braun is a senior member of the Global Hospitality Group® at JMBM. Mr. Braun advises hospitality clients with respect to management agreements, franchise agreements and spa agreements. He also advises on business formation, financing, mergers and acquisitions, venture capital financing and joint ventures, telecommunications, software, Internet, e-commerce, data processing and outsourcing agreements for the hospitality industry. Contact him at 310.785.5331 or rbraun@jmbm.com.

________________________Our Perspective. We represent hotel lenders, owners and investors. We have helped our clients find business and legal solutions for more than $60 billion of hotel transactions, involving more than 1,300 properties all over the world. For more information, please contact Jim Butler at jbutler@jmbm.com or +1 (310) 201-3526.

Jim Butler is a founding partner of JMBM, and Chairman of its Global Hospitality Group® and Chinese Investment Group™. Jim is one of the top hospitality attorneys in the world. GOOGLE “hotel lawyer” and you will see why.

Jim and his team are more than “just” great hotel lawyers. They are also hospitality consultants and business advisors. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them.

About the Authors

Jim Butler

Jim Butler is recognized as one of the top hotel lawyers in the world. He devotes 100% of his practice to hospitality, representing hotel owners, developers and lenders. Jim leads JMBM’s Global Hospitality Group® — a team of seasoned professionals with more than $71 billion of hotel transactions, involving more than 3,800 properties located around the globe.
More

Robert Braun

Robert Braun is a partner in JMBM's Corporate Department and a senior member of JMBM's Global Hospitality Group® -- a team of 50 seasoned professionals with more than $71 billion of hotel transactional experience, involving more than 3,800 properties located around the globe. Bob represents owners in both transactional and operational issues. He advises clients with respect to business formation, financing, mergers and acquisitions, venture capital financing, joint ventures and strategic partnerships. He has represented hotel owners in the negotiation of several hundred management agreements, as well as spa management and franchise agreements. Bob also advises hotel owners regarding telecommunications, software, internet, e-commerce, data processing and outsourcing agreements. To read Bob's articles, go to www.HotelLawBlog.com and select "Management Agreements." For more information, please contact Bob Braun at 310.785.5331 or rbraun@jmbm.com.

Marta Fernandez

Marta Fernandez is a partner in JMBM's Employment and Labor Department and a senior member of JMBM’s Global Hospitality Group® -- a team of 50 seasoned professionals with more than $71 billion of hotel transactional experience, involving more than 3,800 properties located around the globe. As a management labor lawyer with more than 20 years of experience, Marta specializes in representing hospitality industry clients in all aspects of labor and employment including labor-management relations such as union prevention, collective bargaining for single as well as multi-employer bargaining units, neutrality agreements and defense of unfair labor practice charges before the NLRB. She defends employers in administrative and litigation claims, such as employee claims of sexual harassment and discrimination and counsels clients in preventative strategies such as executive training, arbitration enforcement, and policies and procedures. To read Marta's articles, go to www.HotelLawBlog.com and select "Labor & Employment." For more information, please contact Marta Fernandez at 310.201.3534 or at mfernandez@jmbm.com.

Guy Maisnik

Guy Maisnik is a partner in JMBM's Real Estate Department and a senior member of JMBM's Global Hospitality Group® -- a team of 50 seasoned professionals with more than $71 billion of hotel transactional experience, involving more than 3,800 properties located around the globe. Guy's deep and broad transactional practice includes complex real estate finance and venture capital transactions, including project finance, commercial finance, leveraged leasing and real estate acquisitions. He assists clients with development, leasing and disposition, loan portfolio acquisitions, loan and debt restructure, workouts and real estate exchanges. Go to www.HotelLawBlog.com for current information in these areas. For more information, please contact Guy Maisnik at 310.201.3588 or mgm@jmbm.com.

David Sudeck

David Sudeck is a Partner in JMBM's Real Estate Department and a senior member of JMBM’s Global Hospitality Group® -- a team of 50 seasoned professionals with more than $71 billion of hotel transactional experience, involving more than 3,800 properties located around the globe. David has significant experience in the vacation ownership arena, focusing on the formation and registration of condominiums, timeshares and fractional interest regimes. He negotiates hotel, spa and restaurant management agreements, and assists client in the development, acquisition, sale and leasing of hotels, golf courses and restaurants. For David's take on current issues in the timeshare arena, go to www.HotelLawBlog.com and click on the topic, "Timeshare." For more information, please contact David Sudeck at 310.201.3518 or dsudeck @jmbm.com.

Robert Kaplan

Robert Kaplan is a partner in JMBM's Bankruptcy, Insolvency and Restructurings Group and a senior member of the Global Hospitality Group® -- a team of 50 seasoned professionals with more than $71 billion of hotel transactional experience, involving more than 3,800 properties located around the globe. Bob represents lenders, special servicers, hard money lenders, community banks, national banking associations, distressed debt investors, and equity investors, positioning them for the best possible outcome by acting expeditiously to preserve value and increase cash flow. His industry experience and his knowledge of the current capital markets -- where distressed assets often include complex deal structures and securitized loans -- allows him to bring creative and effective strategies to the table. When aggressive litigation is the best strategy, he is a vigorous and effective advocate for his clients. Bob represented the securitized lender in the Chapter 11 bankruptcy case filed by the Clift Hotel in San Francisco, and in the subsequent negotiations and successful sale of the loan to a third party. The lender -- acting by and through GMAC Commercial Mortgage Corporation as special servicer -- was the holder of a $60 million loan secured by a Deed of Trust on the Clift Hotel. He has also served as counsel to CapMark, J.E. Robert Company, Inc., AMRESCO Management Inc. and Midland Loan Servicer in their capacity as special servicers on troubled hotel loans in CMBS pools. For more information, contact Robert Kaplan at 415.984.9673 or rkaplan@jmbm.com.

Martin Orlick

Martin Orlick is a partner in JMBM's Real Estate Department and a senior member of JMBM's Global Hospitality Group® -- a team of 50 seasoned professionals with more than $71 billion of hotel transactional experience, involving more than 3,800 properties located around the globe. Marty specializes in representing hospitality industry clients in Americans With Disabilities Act (ADA) compliance and defense. He has represented more than 500 businesses in ADA issues, many of them hotels and restaurants, as well as hotel mixed-use properties. Marty is a member of the American College of Real Estate Lawyers (ACREL) and a frequent speaker on the ADA and other topics. To read Marty's articles, go to www.HotelLawBlog.com
and select "ADA." For more information, please contact Marty Orlick at 415.984.9667 or morlick@jmbm.com.

James Abrams

James Abrams has significant experience in government affairs at the national level, the state level – including the California Legislature and scores of state agencies – and with local governments and agencies. He has authored successful ballot measures and scores of bills for his clients. Jim served as the President and CEO of the California Hotel & Lodging Association from January 1, 1991 through December 31, 2008 and is currently an adjunct professor in the Hospitality Industry Management Program at the University of San Francisco. He is a frequent speaker and writer on all aspects of the law relating to the lodging and hospitality industries, and he is the author of the book Laws Pertaining to the California Innkeeper, which is published by the California Hotel & Lodging Association. To read Jim’s articles, go to www.HotelLawBlog.com. For more information, please contact Jim Abrams at 415.398.8080 or jabrams@jmbm.com.

Scott Brink

Scott Brink is a senior member of JMBM's Global Hospitality Group® and a partner in JMBM's Labor & Employment Law Department. Scott is a management labor lawyer with more than two decades of experience representing employers in all aspects of labor relations and employment law including union prevention, collective bargaining negotiations, defense of unfair labor practice charges before the NLRB, wrongful discharge litigation, individual and class action employment discrimination and wage-and-hour claims, sexual-harassment litigation, arbitrations, personnel policies, California wage and hour law, and employee discipline and discharge. An experienced trial attorney, Scott has litigated a number of high-profile and complex cases involving a wide range of labor and employment law matters. For more information, contact Scott Brink at RSB@jmbm.com or 310.785.5365.

Travis Gemoets

Travis Gemoets is an experienced trial attorney and represents management in all facets of labor and employment law, including wage/hour class actions, claims of discrimination, harassment, wrongful termination, trade secrets and unfair competition, union/management relations and workplace violence. He is a member of JMBM's Global Hospitality Group(r), in which capacity he negotiates union contracts and resolves labor disputes throughout the country, defends class action claims, develops strategies for the mass onboarding and separation of employees, and recommends proactive changes to employers' policies and practices in order to minimize potential liability risks. Reach him at 310.785.5387 or tgemoets@jmbm.com.

Mark S. Adams

Mark S. Adams is an experienced trial lawyer and a member of JMBM's Global Hospitality Group® and Chinese Investment Group™. He focuses his practice on business litigation including contracts, corporate and partnership disputes, and hospitality disputes and litigation. On behalf of hotel and resort owners, Mark has successfully litigated the termination of long-term, no-cut, hotel management agreements, franchise agreements, fiduciary duty issues, investor-owner disputes, TOT assessments, and more. He has wide-ranging trial experience in a variety of commercial disputes, including complex multi-party litigation and class actions. He has tried numerous cases in state courts, federal courts, and in domestic and international arbitrations, and is a frequent author and speaker on trial practice. Mark's trial wins have been covered by Forbes, Reuters, and other publications. He has obtained two of California's annual 50 largest jury verdicts in the same year. Mark has taken or defended nearly 1,000 depositions throughout North America, Europe and the Middle East. He has been quoted as an expert on noncompete agreements in the Wall Street Journal. For more information, contact Mark at 949. 623.7230 or markadams@jmbm.com.

Jeffrey Steiner

Jeffrey Steiner is a partner in JMBM's Real Estate Department and a senior member of JMBM's Global Hospitality Group® -- a team of 50 seasoned professionals with more than $71 billion of hotel transactional experience, involving more than 3,800 properties located around the globe. He represents both institutional lenders and borrowers in connection with construction and permanent lending, loan work outs and restructurings, real estate development, design and construction contracts, real estate acquisitions and sales, preparation and negotiation of commercial leases on behalf of landlords and tenants, joint venture transactions and hotel management agreements, purchases and sales and financings. For more information, please contact Jeff Steiner at 310.201.3514 or jsteiner@jmbm.com.

Bennett Young

Bennett Young is a partner in JMBM's Bankruptcy, Insolvency and Restructurings Group and a senior member of the Global Hospitality Group® -- a team of 50 seasoned professionals with more than $71 billion of hotel transactional experience, involving more than 3,800 properties located around the globe. His clients include lenders, financial institutions, secured and unsecured creditors, distressed investment funds, businesses, receivers, special servicers and creditors' committees. Ben represented the owner of a partially completed multi-billion dollar resort property in the restructuring of its finances and has represented lenders to hotels and casinos. For more information, contact Ben Young at 415.984.9626 or byoung@jmbm.com

Sheri Bonstelle

Sheri Bonstelle is a partner in JMBM's Government, Land Use, Environment and Energy Department, and a member of JMBM's Global Hospitality Group®. She represents owners and developers in land use, zoning, environmental, litigation and construction matters. She manages all aspects of the entitlement process, including representing clients before local and state agencies, commissions and councils. Sheri also represents clients in a variety of land use and real estate litigation matters in state and federal courts, including cases arising under CEQA and other environmental laws. Her hotel experience includes handling the adaptive reuse of an historic office building as a luxury boutique hotel. For more information, please contact Sheri Bonstelle at 310.712.6847 or SBonstelle@jmbm.com.

Kevin McDonnell

Kevin McDonnell is a partner in JMBM's Government, Land Use, Environment and Energy Department, and a member of JMBM's Global Hospitality Group®. Kevin represents developers and owners of hotels in a broad range of land use and zoning issues including entitlements, code enforcement, easements and parking requirements, as well as related Parcel Map and Tract Map subdivision issues. His hospitality experience includes hotels, condo-hotels and mixed-use projects. A registered Civil Engineer and Structural Engineer in California, and a former building official for the City of Los Angeles, Kevin brings unique experience and insight in Zoning and Building Code applications and Code Enforcement issues. For more information, please contact Kevin McDonnell at 310.201.3590 or kkm@jmbm.com.

Joyce Men

Joyce Men is a business lawyer, an associate in JMBM's Corporate Department, and a member of the Global Hospitality Group(r). Her practice focuses on business transactions including mergers and acquisitions, financing, and acquisitions and dispositions. She serves clients in a variety of industries including manufacturing, hospitality, media, telecommunications, and renewable energy. Joyce also assists clients as outside general counsel, providing guidance on corporate legal matters. For more information, contact Joyce Men at JMen@jmbm.com or 310. 201.3549.

Jon Welner

Jon Welner is a partner in JMBM's Government, Land Use, Environment and Energy Department and a senior member of JMBM's Global Hospitality Group®. He is also the chair of JMBM's Prevailing Wage Group, which advises and defends developers on the most challenging and complex prevailing wage matters in California. California's Prevailing Wage Law has become a tool for workers to demand union wages on virtually any construction project in the state. These claims can increase the cost of a major construction project by millions of dollars-and can be brought years after construction is complete. For more information contact Jon Welner at 415.984.9656 or JWelner@jmbm.com.

Jamie Ogden

Jamie Ogden is a tax lawyer at Jeffer Mangels Butler & Mitchell LLP. He advises individuals and businesses on a range of tax planning, tax controversy and estate planning matters. He serves as lead tax counsel on M&A transactions, financing, internal corporate restructurings and deferred compensation matters. Jamie also works frequently with litigators on the tax aspects of litigation, judgments and settlements. Jamie has extensive experience with foreign compliance matters, including each variation of the IRS amnesty programs. In addition to his experience in private practice, Jamie also brings several years of service from both state and federal government. For more information, contact Jamie at JOgden@jmbm.com or 310.201.3510.

By RSS

By Email

First Name:

Last Name:

Email address:

Search

Ask The Hotel Lawyer ™

Ask the Hotel Lawyer™ is a quarterly column that I write for JMBM's Global Hospitality Advisor®. If you have a question you would like to submit to Ask the Hotel Lawyer™ please use the comments box below. While your question may not be of sufficient general interest for the column, I will try to respond to you individually if you leave your contact information below. Jim Butler.